It’s easy to see why Premium Bonds pull in so many investors. A chance to win a tax-free £1m certainly grabs your attention, especially when it seems apparent that you can’t lose money. Except you can.
Premium Bonds are one of the UK’s most utilised investment vehicles, with 22m people saving in them.
The big selling point of Premium Bonds always used to be that the interest was tax-free. With the tax efficiency of a stocks and shares ISA however, I think that Premium Bonds no longer have the edge. Especially when one considers the low chances of winning even £25.
The current prize rate of a Premium Bond is 1.4%. But more stark are the odds of winning. Returning even a paltry £25 is 24,500 to 1.
I fear that inflation could erode an investors hard-earned savings at that 1.4% so I think the better option is to open up a Stocks and Shares ISA and consider the following growth stock.
Games Workshop Group
When you’re considering buying shares, Games Workshop (LSE: GAW) probably won’t be the first company that springs to mind.
The war-gaming company, founded in 1975, has had a great year though, with its share price rising by roughly 85%. With the constant bad news about the retail landscape in the UK, this news is refreshing.
The increase in the share price means its price-to-earnings ratio is rather high at 28. When considering that the prospective dividend yield is only 2%, I’d normally try to hunt a company trading at a better valuation.
However, over the years, Games Workshop has proven that its growth is consistent.
For a corporation growing as quickly as this one, the low dividend doesn’t concern me. The company’s policy is to only distribute truly surplus cash. If this means the business is funding growth rather than being overly generous, then I’m on board.
Last month, investors were delighted with the Warhammer maker’s trading update. Due to the timing of guaranteed income on new licenses, royalties receivable were “significantly ahead of the prior year”.
This is great news for investors, and it shows that Games Workshop’s strategy of licensing its intellectual property through animation deals seems to be paying off. As a normally cautious investor when it comes to retail businesses, this diversification comforts me.
Another strength of the company is the customer loyalty it has obtained. Lots of people are still fanatical about Warhammer. Having built a community around its brand helps, as does having niche products, and I think this offers a fantastic ‘economic moat’ against rivals entering the market.
Although the price tag for its shares seems high, I still believe that Games Workshop will continue to grow.
When it comes to a long-term investment, I’d prefer to take my chances with this company rather than premium bonds. Even with a low prospective 2% dividend, the payout would return more throughout the year than a 1.4% return of a Premium Bond, and that’s without considering the growth prospects of Games Workshop’s share price.
For a long-term investor, that’s got to be worth a shot.